CPA Canada

Accounting for the “S” in ESG

Adapted by Gigi Dawe, LL.M

(This article was adapted from The Rise of the Social Pillar: An Introduction to the “S” in ESG published by CPA Canada.)

Environmental, social and governance (ESG) issues are attracting increased attention globally, in private, public and not-for-profit sectors. Investors’ view ESG as a material factor when assessing the long-term value of organizations, and stakeholders’ attention to ESG matters has intensified. Consequently, boards and managements are incorporating ESG practices into business decisions and recently, particular attention is being placed on the “social” pillar of ESG.

The universe of social factors The COVID-19 pandemic has further widened social inequities and injustices around the world. The scope of social factors is broad, and includes human rights, diversity, equity and inclusion (DEI), relations with Indigenous peoples and communities, public health and safety, and privacy and freedoms.

One important area, Indigenous peoples and communities, is receiving much justified attention by organizations and governments globally.

The United Nations declaration on the Rights of Indigenous Peoples (UNDRIP) emphasize the rights of Indigenous peoples to live in dignity, to maintain and strengthen their own institutions, cultures, and traditions and to pursue their self-determined development in keeping with their own needs and aspirations.

Indigenous rights and engagement also have unique importance in the Canadian context. In 2015, to advance the process of Canadian reconciliation, the Truth and Reconciliation Commission of Canada made 94 calls to action, including Recommendation 92, Business and Reconciliation.

“We call upon the corporate sector in Canada to adopt the United Nations Declaration on the Rights of Indigenous Peoples as a reconciliation framework and to apply its principles, norms, and standards to corporate policy and core operational activities involving Indigenous peoples and their lands and resources”.

There is broad recognition of the need for demonstrable corporate action with respect to many social issues and failure to address these matters can impact the organization’s financial performance, market value and public opinion. As interest in social factors continues to grow and

evolve, businesses are presented an opportunity to increase their competitiveness by embedding the management of social issues into their strategy and business processes.

Disclosure of Social Factors As stakeholder expectations continue to evolve, the pressure on organizations to report on their social performance grows and reporting frameworks are evolving to meet those expectations. Stakeholders are demanding transparency and accountability beyond traditional financial reporting. ‘S’ has now moved to front-of-mind for investors and is high on the agenda for company stakeholders and society.

The social element of ESG issues can be difficult for investors to assess. Unlike environmental and governance issues which are more easily defined, have an established track record of market data, and are often accompanied by robust regulation, social issues are less tangible, with less mature data to show how they can impact a company’s performance.

According to a 2020 global sustainability reporting survey by KPMG organizations often reference several available voluntary frameworks and standards when disclosing social factors. Organization’s typically chose to use one or a combination of disclosure frameworks.

In November 2021, however, the International Financial Reporting Standards Foundation (IFRS) announced the creation of a new standard-setting board—the International Sustainability Standards Board (ISSB) and indicated the release of a draft set of global sustainability standards in 2022. The IFRS Foundation will consolidate the Climate Disclosure Standards Board (CDSB—an initiative of Carbon Disclosure Project (CDP)) and the Value Reporting Foundation (VRF— which houses the Integrated Reporting Framework and the Sustainability Accounting Standards Board (SASB) Standards).

Opportunities for Business As the focus on social matters sharpens, organizations need to evolve their underlying business and reporting practices to meet the growing demand for action and transparency. Organizations can make meaningful advancements with respect to key social matters both within the organization, as well as in the broader communities in which they operate.

The United Nations (UN) provide principles, goals, and declarations, which address social matters. One of those is the United Nations’ Sustainable Development Goals (SDGs). The 17 SDGs and specific targets within them are aspirational goals to be achieved by 2030. The United Nations Global Compact (UNGC) provides resources and tools to implement and advance the SDGs. Approached as principles, The 10 Principals of the UN Global Compact can be incorporated into an organization’s strategy, policies and procedures to establish a culture of →

There is broad recognition of the need for demonstrable corporate action with respect to many social issues and failure to address these matters can impact the organization’s financial performance, market value and public opinion.

→ integrity; uphold basic responsibilities in the areas of human rights, labour, environment and anti-corruption; and set the stage for long-term success. Organizations that engage in the SDGs to embed relevant goals into their strategy and operations, set ambitious targets and measure and manage impact and contribution in a transparent way.

To develop sound social practices, organizations need to address the following key questions: • What social matters are most important to the organization, investors, and broader stakeholder groups (e.g., local communities in which they operate, global supply chains)? • Does the organization understand the social risks, uncertainties and opportunities in their market, and can it adjust its business model to address them? • How does the organization’s business model contribute to positive or negative outcomes for their customers and the communities in which they operate? • How does performance on social issues impact an organization’s financial results and access to capital? • Where does the organization stand on key social matters and what are its goals for achieving important social outcomes? Role of Accountants Finance professionals and in particular professional accountants, have a critical role to play in addressing the above issues through socially focused business practices and effective measurement, analysis, and reporting of social matters. Professional accountants can influence and inform decision-making, by guiding organizations in the management of social matters. Because they play significant roles in governance, risk management and control, business analysis and decision support, they can help organizations address the following areas: • identifying which social matters are material to the organization and what social information/ data to report on, including determining materiality of social matters for regulatory purposes and developing metrics to measure impact and performance • aligning corporate activities with social goals and benchmarking disclosures and key performance indicators against domestic and foreign industry peers • strategic planning and budgeting and external reporting for the social initiatives • evaluating performance on social issues throughout the supply chain • managing competing investor and other stakeholder demands for voluntary disclosure, including determining under which of the

various voluntary disclosure frameworks to report • establishing appropriate processes, policies, data collection systems, and internal controls to capture and report meaningful, complete, accurate, and timely social information and, most importantly, measuring the impact of these social factors.

The social pillar of ESG is complex with a wide range of multidimensional issues. As the focus on ESG continues to evolve, the accounting profession will play a pivotal role in helping organizations integrate social and environmental considerations intotheir strategy, culture, risk management and business processes. This will include exploration of new and innovative performance measurement and impact assessment tools and approaches to help inform decision-making, which will contribute to the long-term success and sustainability of organizations, and better outcomes for society. ◆

About the author Gigi Dawe, LL.M, is Director of Corporate Oversight and Governance. Chartered Professional Accountants of Canada

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